China to reform money market pricing to eliminate manipulation-sources

Tue Mar 25, 2014 8:11am EDT

* New method for calculating key interest rates

* Opening quotes to be calculated by call auction

* Trial to begin overnight and 7-day repo rates

* Repo rates used as benchmark for broader bond mkt

By Xize Kang and Gabriel Wildau

BEIJING/SHANGHAI, March 25 (Reuters) - The regulator for China's interbank money market will change the way it calculates the opening price for two benchmark interest rates, sources told Reuters on Tuesday, in a bid to reduce the ability of individual banks to manipulate key rates.

The National Interbank Funding Center, which is controlled by the central bank, will use a new method to calculate the opening quote for the overnight and seven-day bond repurchase rates, four sources told Reuters.

These rates, which measure the cost that banks charge for lending to each other, are considered key benchmarks for domestic liquidity conditions. The plan could eventually be expanded to include other tenors, the sources said.

Rather than simply publishing the rate for the first trade, the center will use the so-called "call auction" method to calculate the official opening rate, which often serves as a key reference for pricing in the broader bond market.

The center will seek quotes between 9:00 and 9:25 AM local time each day from a group of 50 banks of various sizes in order to determine the opening price.

The new system will be introduced soon, according to the sources, but they could not specify a date. The National Interbank Funding Center did not immediately answer calls seeking comment

The call auction method is also used by stock exchanges around the world to calculate the official opening price of stock indexes. The method involves averaging price quotes from multiple market participants, rather than a single bilateral transaction.

"In order to raise the efficiency of counterparty matching and exhibit fairness, the minimum amount for a single transaction (to be counted in the opening price) is 100 million yuan ($16 million), and the largest is 500 million," a source with direct knowledge of the plan told Reuters.

"A single institution will be able to quote no more than five transactions for a single call auction product," the source said.

Market participants say regulators are concerned that individual banks may be able to manipulate the opening quote for key money-market interest rates, which are often used as a reference for pricing bonds, interest-rate swaps, and other fixed income products. ($1 = 6.1888 Chinese Yuan) (Editing by Simon Cameron-Moore)